Pool Corp (POOL) 2012 Q1 法說會逐字稿

Good morning and welcome to the Pool Corporation first quarter 2012 earnings conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mark Joslin, Vice President and Chief Financial Officer. Please go ahead.

Thank you, Valerie. Good morning, everyone, and welcome to our first quarter 2012 conference call. I would once again like to remind our listeners that our discussion, comments and the responses to questions today may include forward-looking statements, including management's outlook for 2012 and future periods. Actual results may differ materially from those discussed today. Information regarding the factors and variables that could cause actual results to differ materially from projected results is discussed in our 10-K.

Now I'll turn the call over to our President and CEO, Manny Perez de la Mesa. Manny?

Thank you, Mark, and good morning to everyone. Well, the unusually mild winter prompted many pool owners to open their pools earlier than normal in seasonal markets, or increase pool use in year-round markets, both of which contributed to our sales growth in the quarter. Some of the sales increase is a shift from the second quarter, but part of it is a benefit for the quarter and 2012, driving our EPS range increase for the year. As evidenced by the major market increases referenced later, the weather benefit was primarily in the eastern half of North America, with western markets' weather much closer to normal in the quarter.

Besides weather, market share gains and modest market growth also contributed to our sales increase. In terms of base business sales, our Blue business sales were up 13.6%, while our Green business sales were up a more modest 2.2%. This difference is due to both the impact of weather and the Green business being much more heavily weighted to new construction instead of an installed base. The east versus west contrast becomes apparent as California, Texas and Arizona Blue sales were up 7% in aggregate, while Florida and all other Blue markets were up 18.1%.

I believe that 7% is more reflective of our expectations for the balance of 2012, with roughly half of that growth coming from share increases and the other half from market expansion and inflation. Our sales growth in our strategic priority customer segment, retail, was over 10%, aided by favorable weather as well as market share gains. Our strategic priority product category, building materials, had over 25% sales growth in the quarter, which was primarily driven by market share gains, together with some market recovery in remodeling activity.

Since many of you asked about our European business given the well publicized economic issues there, our base business sales in local currency were up 6.8% in the quarter in Europe. As additional information, our Europe business will represent less than 7% of our total 2012 sales. At this juncture, other than the weather benefit in the quarter, our expectations for 2012 are just like they were in February when I provided annual market, sales and EPS guidance. Mark will address the rest of the P&L and balance sheet with everything being on track with expectations.

Now I'd like to share some perspective on our business, followed by an update on new locations both acquired and startups. We are presently in our 19th year operating in the domestic Blue business. Over these past years, we have gradually built our SCP and superior networks step by step via a combination of new openings and acquisitions with the understanding that each market is unique and customer characteristics are also different, especially in seasonal versus year-round markets.

The development of our networks was based on participating in all of the medium-size and larger markets, with those markets being premised primarily on the installed base of pools, which drive recurring maintenance, service and remodeling/replacement activity. Simultaneous with the building of our networks, we also invested in technology, marketing, logistics, best practices, and most importantly talent development that all together have enabled us to consistently increase market share as we provide a differentiated service and value proposition to our customers and suppliers.

This is important to note as our success is primarily attributable to our investment decisions that we have made and have executed on for many years. As many of you are aware, there's a strong correlation between operating results and the sales center's tenure with Pool. Meanwhile, we are in our 14th year operating internationally, with the same strategic goals and process.

The two inhibiting factors though, are the administrative drag from country specific regulatory requirements and our being less able to mobilize talent to address opportunities as we do domestically, given language and cultural differences. This second item is critical as we realize progress is at a slower pace. To further build out our international network, in the past 18 months we have added locations in Germany, Belgium, western Canada and north of Ontario -- or north of Toronto and Ontario. And we'll also be adding a third location in Mexico next month.

Our Green business has many of the same long-term market attributes as the Blue business, which is what drew us to it many years ago. The major difference between the two is the much greater dependence on new home and commercial construction in the Green business, with the full impact from that volatility felt from the peak of 2006-2007 to the trough of 2009 -2010. Nonetheless, we are in our eighth year and making progress with the same approach and investments as we are in our Blue business.

Here, we've expanded in the past 18 months with new locations in Nevada, Florida, Maryland and also in Virginia later this quarter. In each case, our objectives are the same. Participate in every mid-size and larger market, investing in tools and resources to increase share, and produce the long-term profit and return on capital that our shareholders expect. Now I'll turn the call back over to Mark for his financial commentary.

Thank you, Manny. I have a number of things to cover this morning, starting with margins. As you can see from our results, our gross margins were down 32 basis points year-over-year, primarily because of the difficult comp we had from a year ago. To retrace history for a moment, we entered 2011 with greater early-buy inventory purchases made in advance of year-end vendor price increases, which helped us grow our margins early in the year.

For the first quarter of 2011, we recorded an increase in our gross margins of 94 basis points over 2010 first quarter. We also made some in-season pre-price increase purchases last year, and therefore made more modest early-buy purchases going into the 2012 season. Going forward, our expectations are for neutral to slightly positive year-over-year gross margin gains for the remainder of the year, as the effect of last year's gains subside and our normal margin management practices are more evident.

Although we face a bit of a challenge here given our 40 basis point improvement for the year last year compared to 2010. Moving down the P&L to SG&A expenses, you can see that in total our expenses were up $7.7 million or 8.5% for the quarter. Base business expenses, which exclude acquired businesses, were up $4.3 million or 4.8%.

You may recall that the guidance I gave on expenses for the year on our last call was that we expected modest expense growth overall, with higher growth during the first and fourth quarters due to the timing of incentive accruals. I would footnote that statement with a caveat that if our revenue growth is greater than expected, as was the case this quarter, we logically expect expenses to be modestly higher. All in all, our first quarter base business expense growth was in line with our expectations, and our guidance for the year on expense growth remains unchanged.

Tax is a subject I don't cover often as we generally have a relatively stable tax rate. That won't be the case this year because of the weather back in 2008, August, actually, in 2008. That was when hurricane Gustav hit which pushed back our tax filing that year to January 2009. The result of that is that we have two tax years expiring in 2012 instead of the usual one, resulting in our expectation for a slightly lower effective tax rate of about 38% this year, compared to a more normalized rate of about 39%.

By quarter, we expect Q2 and Q4 to be slightly above the full year rate, while Q3 will be slightly below it. As mentioned in our earnings release, this resulted in a $0.02 EPS benefit in the first quarter, and we expect an additional $0.01 to $0.02 EPS benefit in the third quarter. Moving on to the balance sheet and cash flow, there is really nothing unusual to report here this quarter. The growth in our inventory and receivables is in line with our business growth, though we continue to make excellent improvement in our receivables management with our day sales outstanding, or DSO, now down to 29.7 days from 31 days a year ago.

From a cash flow perspective, our seasonal cash usage in the quarter of $34 million was slightly less than a year ago. We have no change in our annual cash generation guidance, which is that we expect cash generated from operations to exceed our reported net income, and our CapEx will be 1% of sales. Let me now update you on our share repurchases and our share count.

During the quarter, we repurchased 24,274 shares at an average price of $35.98. After the end of the quarter, we repurchased an additional 50,400 shares at an average price of $35.92. This brings our current open board authorization to $65.5 million. Some of you may have been tripped up by our share count at the end of the quarter. Since we reported profit in the first quarter, which is something we haven't done in a few years, we used fully diluted shares to calculate our reported EPS instead of basic shares as in the past few years when we reported a net loss.

Excluding the impact of any share repurchases we might make, we would expect a modestly higher diluted share count in the second and third quarters, due to equity exercises. And for the fourth quarter, we're still a long ways from reporting income, so we'll be using basic shares in our EPS calculations. One other item that I would like to point out to you before I turn the call back over to the operator is what I call a model-tweaker that you may not be aware of. This relates to the number of billing days in the third quarter, which because of the quirk in the calendar will be two less than the third quarter of 2011, and two less days for the full year.

The lost days are in September, which is better than July, but still meaningful and worth adjusting your models for. That concludes my prepared remarks, so I'll turn the call over to our operator to begin our question-and-answer period. Valerie.

We will now begin the question-and-answer session.

(Operator Instructions)

Leah Villalobos, Longbow Research.

Good morning and great start to the year. I was wondering, on the five centers that you acquired during the quarter, if you would be able to provide the last 12 months of revenue for those.

Let me see, the first one was Ideal in western Canada, and then the other one was an operation in Barrie, just north of Toronto in Ontario. The total revenues for those would be about $8 million US.

And then just -- is there any way in the first quarter -- I know that weather was a nice factor in the eastern part of the US. Is there any way to quantify how much of an impact weather was during the quarter?

It is very tough to quantify, Leah. Our best guess, and I'll phrase it as such, given the nature of the products and everything else, is probably about $10 million to $15 million, shifted from April to March.

So would that just be the shift, or would that also be -- include the increase you would see in maintenance just --

No, no, that would be the shift.

That would be the shift, okay.

The rest is sustainable, so to the extent that pool owners used their pools more or the fact that they opened it earlier and consumed more chemicals, for example, that would be a permanent gain.

Okay. That's helpful. And then you had called out the building materials product categories specifically. Are there other categories where you're seeing significant share gains or is that just more broad based in the balance of the business?

It is more broad based. If you look at our -- whether it be product categories like chemicals, equipment, parts, etcetera. In all of those areas, we realize share gains, but the order of magnitude percentage wise is not as significant as we've been able to realize, not just in the first quarter of 2012 but over the course of the past several years in the case of building materials.

Okay. Thanks a lot for taking my questions.

Thank you, Leah.

David Mandell, William Blair.

Good morning. The base business operating leverage was up pretty strong this quarter. Is that something we could expect for the rest of the year?

Not 13%. You know, base business growth, the guidance that we provided for the year a couple of months ago we -- is more mid to high single digits. I mentioned that as being 5% to 8%, and I think that that's a reasonable expectation for the balance of 2012, with about half of that being the market growth, which includes both units and inflation and the other half being share gains.

So that's a more reasonable expectation. Certainly we expect the weather to be normal for the balance of the year and that's really factored into that. And weather is not as significant a factor in the heart of the season as it is in the shoulders.

And you would expect the operating expenses to grow at a slower rate than the mid to high single digits or --?

Oh, definitely. As Mark communicated in February in the call, with 5% to 8% type top-line growth, our expense growth would be more like 2% to 4%.

In terms of operating leverage, I mean, our expectation for the year is roughly 20%.

On base business.

On base business, yes. So --

All right. Thank you.

Luke Junk, Robert W. Baird.

Good morning, guys, thanks for taking my question this morning. Manny, my first question would be as we look to the early start to the pool season here, I know you referenced clearly some benefits from increased consumption of consumables as folks either open their pools early or just use them more in year-round markets. Do you get a sense that there is any benefit to the capital spending in terms of people investing with the early start to the season or is that just too hard to parse out?

No, there is some of that activity, some -- there is some replacement activity that would have naturally taken place, let's say, in April that took place in March. There is a little bit more new pool construction that would have taken place in March -- I mean in April, that this year it took place in March. So there's a little bit of movement there and as I answered Leah, our guess is that was about $10 million to $15 million that shifted, and that would be in the nature of replacement, remodeling, new activity that shifted from April to March.

And then within that $10 million to $15 million that shifted, Manny, do you have an estimate for the year-over-year growth in the maintenance type things versus the more discretionary this quarter?

Well, yes. If you look at, for example, the retail sector, which is over 70% of the pool owners that maintain their own pools, and they go to a retail store to get their basic supplies, our sales in that retail space to retail customers was 10% year on year. So, therefore -- and we don't think that's -- that's higher than normal because the install base is up only 1% roughly from year to year.

Inflation and those product categories are virtually nil year on year, so therefore while we certainly gained share, I don't think we gained 9% share, so -- so that's -- that's, I think, a reflection of the fact that you had better weather.

And given the 13% base business growth, the discretionary items were growing faster overall, so in the mid to upper teens, you would say on the discretionary side.

Okay, that's very helpful color. Second would be within the positive trends that you saw in the first quarter here in your guys' continued view that we're in this gradual recovery in terms of discretionary spending, a lot of folks that we're talking to in the industry I would say share that view. And along those lines, it seems like we're maybe seeing a little bit of uptick in acquisition activity.

Could you maybe talk about how the sellers that you're talking to are feeling about their willingness to sell today versus the current market back drop versus a year or two years ago? Can we expect to see continuing acquisitions here?

Well, we look at that on a market-by-market, every market is unique and has its own characteristics. So in markets where we have already a very strong position, acquisitions are not as attractive for us. Whereas in markets where we have very limited participation or no participation, those are certainly more attractive and we contract that with opening our own locations as we've opened up over a hundred locations over the past 14 years that I've been here.

So in essence we look at both alternatives. Certainly in this environment, given the market still being depressed, there is a sense of there being enough or in the case of the Green business, certainly too much distribution, and that shakeout is still happening. So to that end, acquisitions are probably a lower cost of entry than a new opening in this environment. And following that train of thought, that's why you will see from us more acquisitions internationally, and more acquisitions from the Green side because that's where we're still in more of a development mode where we are not -- nowhere near completing building out our networks.

On the domestic Blue business side of the equation, there are a couple of pockets where we have a weak presence, but we have, over the course of the past 19 years, through both opening of new locations and acquisitions, largely built out that network. Again, there's still some pockets, but we have largely built out that network on the domestic Blue side.

Okay, that's helpful. Mark, just one clarifying question on the guidance. I know you mentioned the tax benefit both in the quarter and through the remainder of the year. I assume that's embedded in the guidance that you gave?

It sure is. As is the two-day adjustment to the third quarter.

Okay, perfect.

That's all rolled into our new guidance range.

Okay, that's very helpful. Thanks, guys.

Sure.

Thank you, Luke.

David Mann, Johnson Rice.

Thank you, good morning. Great job.

Thank you.

A couple of questions -- clarification. On the earlier comment about the sales shift of revenue from Q2 to Q1, you talked about that, yet you did not change your Q2 guidance, it doesn't sound like. So can you just elaborate or reconcile that?

Well, we don't provide quarterly guidance, David, so we are basically saying that when you look at the rest of the year, it's pretty much in line with what we were expecting earlier. We were aware of the two days drop off, and we were aware of tax and things of that nature, which kind of offset one another, so in essence our expectations are pretty much normalized. Also, $10 million to $15 million, let's just call it $0.02 to $0.03 impact, the second quarter is a big quarter, so I'd say that's in the -- that's buried in the range of expectations.

Got you, that's helpful. In terms of the quarter to date trend in April, and just sort of what you're seeing in weather there, can you just comment a little bit on that?

Weather is a lot less of a factor in April than certainly in the first quarter, and it's pretty much along the lines of our expectations of 5% to 8%.

Okay, great. In terms of the base business performance in the first quarter, the contribution on the EBIT line was the flow through was less than the 20%. Can you just talk about was there an increased bonus accruals there or something else going on?

Well, the leverage is different every -- in the different quarters, but I think the -- when you look at it from a year standpoint, I think the 20% is a valid number. And again, it won't be 20% every single quarter, it could be 22% in the second quarter and it could be 16% in the first quarter.

And, David, just on the bonus question, I think I went through that in a little detail maybe on the year-end call, but we don't do that on straight line basis. It's really more accrued based on a profitability, which obviously the second and third quarter are the big quarters from a profitability standpoint. And so it has more impact in the first and fourth quarters.

Okay, that's helpful. And then, Manny, in your prepared comments and I think answering an earlier question, you talked about the modest recovery in refurbishment and sort of rehab, more major rehab of pools. Can you give a sense, do you feel like there's been any level of acceleration, perhaps with a little more positive housing psychology out there that you're seeing relative to let's say the back half of last year?

Nothing significant. I mean, it's still very early, but what -- I'd say by far, by far, the biggest impact or the biggest reason for our being up over 25% in building materials sales in the quarter year on year is market share growth.

Okay.

By far. And I think that the recovery of remodeling/replacement activity to its normalized behavior, it is happening, it started happening a bit last year. I think it will continue through this year. But it could be very well, as we've indicated in our own models, 2018 before it's normalized. So I think it's that pace. I don't think it's necessarily changed from last year.

Okay. In terms of the markets that you bunched together, California, Texas and Arizona, is there anything going on different -- obviously 7% pales a little bit to the 18% you talked about in Florida and other, but still a very nice number, especially for California I think, where you've been hopeful that that would pick up in pace. Any comments you'd make about the trend in California and/or Texas?

I think it's -- those markets were not affected by the weather to speak of, so they were more normal and I think that 7% is really kind of like in the middle of our expectations for the year. So I think that's normalized activity, whereas Florida, and really it's not just Florida it's the whole Southeast, and going up to the Northeast and Midwest. The whole rest of the market area being up 18%, I think, is really -- you can see the contrast and how -- and what the impact of weather was.

I guess what I was getting at is are you seeing anything in California that's more encouraging to you given it's kind of being a laggard in recent years?

I would say yes, but I'm still cautious because it's still early in the season. I think the California economy is not -- not doing anywhere near as Arizona or Texas, so when you group the three together I think that it's coming along fine. But I think California is still going to be a laggard because of the situations they have with employment loss in the marketplace.

Very good, thank you, best of luck in the season.

Thank you.

(Operator Instructions)

Anthony Lebiedzinski, Sidoti &

Good morning. Just wanted to follow up on a previous comment. I think, Manny, you had said that you expected to see more acquisitions internationally. Is that just on the Blue side of the business or would you be open to actually doing something on the Green side of your business?

We are certainly open to the Green side of the business, although the focus on the Green side is domestically. And when I say more I would say not more in the absolute sense, it's at -- that's where our activity will be, it will be any acquisitions that we do, it will be heavily weighted towards international and Green.

Okay. And, also, what is your -- what's embedded in your guidance for the Green business from both a top and bottom line perspective for 2012?

Similar in terms of top line, similar to the Blue business, 5% to 8% for the year in terms of top line growth. And certainly bottom line improvement, with a flow through of about 20% of sales increase, base business sales increase.

Got it. And, also, has your outlook on construction activity changed from your previous call?

No. We're still thinking that new construction activity on the pool side is still extremely depressed. We believe it will be up modestly this year. Modestly, maybe 5,000 to 7,000 more pools being built this year than last year. But it's still a fraction of what it was at peak, and probably 40% of normal.

And what is your outlook for pricing for this year?

Pricing is overall probably looking at inflation of still 1% to 2%. The equipment manufacturers increased their prices last year, but they -- the effective increase was at the end of the year, so that -- those prices increase are really -- began to be felt latter part of the year, of last year and then through this year. But on chemicals, that hasn't changed to speak of. If anything, some markets -- and that's not really many factors, it's just some competitors just selling some products at a lower margin, but bottom line is chemicals is really no price increase there and, as you know, that's our biggest product category. So overall, I think 1% to 2% is still reasonable.

Okay, thank you very much.

Thank you.

Keith Hughes, SunTrust.

Thank you. Two questions. One, to build on the renovation discussion, is there going to be any kind of leading indicator for you when this business starts to come back, whether it's permits or forward order rates that are filed by contractors? Or is it just going to show up one day in terms of some orders at the desk?

In the replacement/remodeling activity, I would say if you're going to look at a leading indicator, I would look at consumer confidence, and I would look at employment or reduced levels of unemployment.

The internal metrics that --

Oh, internal metrics, we have certain product categories that are -- that jump, that are more discretionary in nature, and we see that happening. But there's no backlog per se, our customers order for the day, usually at most for the next day, so -- which is a value we provide as a distributor. So, therefore, there's no other forward indicator that we can think about.

Okay. And second question, is there a renovation opportunity in the Green business as well?

Yes, but far more modest. That would be along the lines of somebody redoing their landscape lighting or things of that nature, but proportionately it's a lot less significant. There the heavy play is when you put in the irrigation system and you do the -- do it for the first time, where you not only put in the sprinklers, but you also put in all the pipe and you put in the landscape lighting and you do all those things and that's the major bulk up front. After that, it's very low level of maintenance costs with perhaps if you, again, update your landscape lighting, but that's a more modest part of the total.

All right. Thank you.

(Operator Instructions)

This concludes our question-and-answer session. I would like to turn the conference back over to Manny Perez de la Mesa for any closing remarks.

Thank you, Valerie, and thank you all again for listening to our first quarter results conference call. Please mark your calendars, our next call will be on Thursday, July 19 when we will discuss our second quarter results. Thank you again. Have a good day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.